Question

Answer A &B&C USING CHARTS

Lock-Tite Company

Jobs Report – Traditional OH allocation (Direct Labor Dollars)

Year Ending December 31

		JV28	BY92	ZF14
Sales Revenue		132,800	99,600	92,960	Calculated in 7e)
Job Costs:
Direct Material		26,560	19,920	13,280	From 7a)
Direct Labor		7,842	5,882	5,882	From 7b)
Overhead		4,313	3,235	3,235	From 7c)
Total Job Costs		38,715	29,037	22,397
Gross Margin		70.85	70.85	75.91
Gross Margin %		53%	71%	82%

Lock-Tite Company
Job Report – ABC
		JV28	BY92	ZF14
Sales Revenue		132,800	99,600	92,960
Job Costs:
Direct Material		26,560	19,920	13,280
Direct Labor		7,842	5,882	5,882
Overhead – from 8		36,330	29,420	37,761
Total Job Costs		70,732	55,222	56,923
Gross Margin		0.47	0.45	0.39
Gross Margin %		47%	45%	39%

1. Comparing the Gross Margin percentages of the jobs under the Activity Based Costing system, which job is more attractive for Lock-Tite to sell? Could the company be overcharging their customers for this job? Explain using complete sentences and 30 to 50 words.

1. b. Do you think the company’s policy of using a factor times direct material costs to set selling prices is a good policy? What would change if they used “total costs” to establish selling prices? What other information might be helpful to make this decision. Make sure you explain your answer using full sentences and 30 to 50 words.

1. c.Should Lock-Tite Company switch to ABC method? Explain how it may or may not help manage their company. Use complete sentences and 30 to 50 words.

Answer 1

a. From the job report for the year ending 31.12. it is seen that gross margin % for job ZF14 is the highest. So that job is more attractive for lock-Tite to sell. However it is evident that the company is undercharging gross margin % to the customers becasuse of the fact that job JV 28 has sales revenue $132800 and Total job cost-38715 so the gross margin comes to =$94085 and in terms of % it is 94085/132800=70.85% but the company is charging 53% gross margin to its customers.

b. Company's policy of using factor times of direct material cost is not good for taking any type of decisions. This is because of the fact that variable cost is considered as relevant cost and variable cost comprises direct material, direct labour and variable overhead. So fixing selling price merely by factor of direct material cost will underprice the product. If total cost method of pricing is used fixed cost will be included in cost which is not at all relevant for decision making. Hence break up of fixed and variable overheads will be helpful in making decisions.

c. Lock-tite must not switch to ABC method of costing because it is used for allocating overhead to the products and services.Here it is perferrred if the company adopts job costing.